Monday, November 23, 2009

Carry Trade.

.The US dollar is currently a bl**ding nuisance for half the countries on planet Earth. Low interest rates and easy money in the US are currently resulting in carry trade which results in dollars flowing into many other countries. This makes it difficult for such countries to maintain the exchange rates they want, and the availability of credit that they want.

But interest rates in the UK are no different to the US. And the amount of quantitative easing in the UK is roughly the same (as a proportion of GDP) as in the US. Yet the British pound is not nearly as popular with “carry traders”. Why the difference?

Possibly the explanation is as follows. Around 99% of the bonds quantitatively eased in the UK are UK government bonds (i.e. “gilts”). In contrast, in the US, the equivalent proportion seems to be about 20%, with the remaining bonds being private sector bonds.

Now there is a difference. The UK policy in effect puts money into the pockets of ordinary UK citizens and businesses big and small. The US policy puts money into the hands of professional investors: rich individuals and institutions.

Now the average UK household and average UK small business is not going to run out and spend its recently expanded bank balance on strange South American shares or bonds. In contrast, professional investors are more likely to.

Put that another way, the US has given professional gamblers more money to gamble with.

Moreover, why does the US have a “Troubled Asset Relief Program” (TARP) – and why do other countries have an equivalent? If some rich individual or institution has made bad investments, then s*d them.

The US should have channelled 100% of stimulus money to Main Street and ignored Wall Steet. If that had resulted in a hundred and bankers and stockbrokers jumping from tenth storey windows, who cares?

In this connection the warning by the IMF that any more handouts for the financial sector could lead to violence looks apt.